As Filed with the Securities and Exchange Commission on September 13, 2001
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13
of the Securities Exchange Act of 1934
For the Fiscal Year Ended June 30, 2001
MIDWEST GRAIN PRODUCTS, INC.
1300 Main Street
Box 130
Atchison, Kansas 66002
Telephone: (913) 367-1480
Incorporated in the State of Kansas
COMMISSION FILE NO. 0-17196
IRS No. 48-0531200
The Company has no securities registered pursuant to Section 12(b) of the
Act. The only class of common stock outstanding consists of Common Stock having
no par value, 8,203,354 shares of which were outstanding at June 30, 2001. The
Common Stock is registered pursuant to Section 12(g) of the Act.
The aggregate market value of the Common Stock of the Company held by
non-affiliates, based upon the last reported sales price of such stock on August
13, 2001, was $59,767,424.
The Company has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and
has been subject to such filing requirements for the past 90 days.
As indicated by the following check mark, disclosure of delinquent filers
pursuant to Rule 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in a definitive proxy or
information statement incorporated by reference in Part III of this Form 10-K:
[ ].
The following documents are incorporated herein by reference:
(1) Portions of Midwest Grain Products, Inc. 2001 Annual Report to
Stockholders, pages 17 through 36 thereof, are incorporated by
reference into Part II and contained in Exhibit 13.
(2) Portions of Midwest Grain Products, Inc. Proxy Statement for the
Annual Meeting of Stockholders to be held on October 11, 2001, dated
September 14, 2001, are incorporated by reference into Part III of
this report to the extent set forth herein.
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CONTENTS
PAGE
PART I
Item 1. Business..........................................................2
General Information...............................................2
Wheat Protein Products............................................3
Premium Wheat Starch..............................................7
Alcohol Products..................................................8
Flour and Other Mill Products....................................10
Transportation...................................................10
Raw Materials....................................................11
Energy...........................................................11
Employees........................................................11
Regulation.......................................................12
Item 2. Properties.......................................................12
Item 3. Legal Proceedings................................................13
Item 4. Submission of Matters to a Vote of Security Holders..............13
Item 4A. Executive Officers of the Registrant.............................14
PART II
Item 5 Market for the Registrant's Common Equity and Related
Stockholder Matters................................................16
Item 6. Selected Financial Data............................................16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation...........................................16
Item 7A. Quantitative and Qualitative Disclosure About Market Risk..........16
Item 8. Financial Statements and Supplementary Data........................16
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...............................................17
PART III
Item 10. Directors of the Registrant........................................17
Item 11. Executive Compensation.............................................17
Item 12. Security Ownership of Certain Beneficial Owners
and Management.....................................................17
Item 13. Certain Relationships and Related Transactions.....................17
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K...........................................................17
SIGNATURES....................................................................20
FINANCIAL STATEMENT SCHEDULES................................................S-1
Report of Independent Public Accountants on Schedules.......................S-2
Schedule VIII. Valuation and Qualifying Accounts...........................S-3
The calculation of the aggregate market value of the Common Stock of the
Company held by non-affiliates is based on the assumption that non-affiliates do
not include directors. Such assumption does not constitute an admission by the
Company or any director that any director is an affiliate of the Company.
This report, including the portions of the Annual Report incorporated
herein by reference, contains forward-looking statements as well as historical
information. Forward-looking statements are usually identified by or are
associated with such words such as "intend," "believe," "estimate," "expect,"
"anticipate," "hopeful," "should," "may" and similar expressions. They reflect
management's current beliefs and estimates of future economic circumstances,
industry conditions, Company performance and financial results and are not
guarantees of future performance. The forward-looking statements are based on
many assumptions and factors including those relating to grain prices, gasoline
prices, energy costs, product pricing, competitive environment and related
market conditions, operating efficiencies, access to capital and actions of
governments. Any changes in the assumptions or factors could produce materially
different results than those predicted and could impact stock values.
1
PART I
Item 1. Business.
General Information
Midwest Grain Products, Inc. (the Company) is a Kansas corporation
headquartered in Atchison, Kansas. It is the successor to a business founded in
1941 by Cloud L. Cray, Sr.
The Company is a fully integrated producer of wheat protein, which includes
vital wheat gluten and specialty wheat proteins, premium wheat starch and
alcohol products. These grain products are processed at plants located in
Atchison, Kansas and Pekin, Illinois. The Company also operates a wheat protein
and wheat starch mixing facility in Kansas City, Kansas. Wheat is purchased
directly from local and regional farms and grain elevators and milled into
flour. The flour is processed with water to extract vital wheat gluten, a
portion of which is further processed into specialty wheat proteins. Vital wheat
gluten and most wheat protein products are dried into powder and sold in
packaged or bulk form. The starch slurry which results after the extraction of
the gluten and wheat proteins is further processed to extract premium wheat
starch which is also dried into powder and sold in packaged or bulk form. The
remaining slurry is mixed with corn or milo and water and then cooked, fermented
and distilled into alcohol. The residue of the distilling operations is dried
and sold as a high protein additive for animal feed. Carbon dioxide which is
produced during the fermentation process is trapped and sold. As a result of
these processing operations, the Company sells approximately 95% (by weight) of
grain processed.
The table below shows the Company's sales from continuing operations by
product group for each of the five years ended June 30, 2001, as well as such
sales as a percent of total sales.
PRODUCT GROUP SALES
Year Ended June 30,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(thousands of dollars)
Amount % Amount % Amount % Amount % Amount %
Wheat Protein Products $49,762 21.7 $70,912 30.6 $ 56,153 26.0 $ 42,489 19.0 $ 39,968 17.8
Premium Wheat Starch 27,907 12.2 29,186 12.6 27,173 12.6 27,791 12.4 29,935 13.3
Alcohol Products:
Food Grade Alcohol
Beverage Alcohol 25,005 10.9 27,728 11.9 30,373 14.1 35,934 16.1 43,118 19.2
Food Grade 17,315 7.6 16,136 7.0 19,276 8.9 27,487 12.3 38,004 16.9
Industrial
Fuel Grade Alcohol 83,686 36.4 62,066 26.7 54,639 25.3 51,227 23.0 34,992 15.6
Alcohol By-products 23,532 10.3 23,093 10.0 25,441 11.8 33,259 14.9 34,553 15.4
------ ---- ------- ----- ------- ----- ------- ----- ------- -----
Total Alcohol 149,538 65.2 129,023 55.6 129,729 60.1 147,957 66.3 150,667 67.1
------- ---- ------- ----- ------- ----- ------- ----- ------- -----
Products
Flour and Other Mill
Products 2,034 0.9 2,759 1.2 3,046 1.4 5,017 2.3 4,163 1.8
----- ---- ------- ---- ------ ---- ------ ---- ------ -----
Net Sales $229,241 100% $231,880 100.0 $216,101 100.0 $223,354 100.0 $224,733 100.0
======== ==== ======== ===== ======== ===== ======== ===== ======== =====
The Company's results for fiscal 2001 declined from the prior fiscal year.
Net income was $2.7 million compared to $4.9 million in fiscal 2000, due
principally to abnormally high energy costs resulting from a dramatic rise in
natural gas prices. Reduced sales for the Company's vital wheat gluten, premium
wheat starches and food grade alcohol were also affecting factors. Improved
selling prices for the Company's alcohol products, non-operating income from a
two year Department of Agriculture program that began in June, 2001 and growth
in sales of specialty wheat proteins were the principal reasons for the
Company's profitability for the current fiscal year.
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The bulk of the Company's sales are made directly to large institutional
food and beverage processors and distributors with respect to which the Company
has longstanding relationships. Sales to these customers are usually evidenced
by short term agreements that are cancelable within 30 days and under which
products are usually ordered, produced, sold and shipped within 60 days.
However, a substantial amount of the Company's fuel alcohol is sold under longer
term contracts, primarily to cover the needs of gasoline refiners during
September through April of each year. None of the Company's customers accounted
for more than ten percent of the Company's consolidated revenues during fiscal
2001.
Historically, the Company's sales have not been seasonal except for
variations affecting alcohol and vital wheat gluten sales. Fuel alcohol sales
usually increase during the period August through March due to requirements of
the Clean Air Act which inhibit the sale of ethanol in certain areas of the
country during May 1 through September 15 each year. Certain environmental
regulations also favor greater use of ethanol during the winter months of the
year. See "Alcohol Products- Fuel Grade Alcohol." Beverage alcohol sales tend to
peak in the fall as distributors order stocks for the holiday season, while
vital wheat gluten sales have tended to increase to a minor extent during the
second half of the fiscal year as demand increases for hot dog and hamburger
buns and similar bakery products. During the next year the Company expects
declining vital wheat gluten sales due to the expiration of the quota on imports
of wheat gluten into the United States. See "Vital Wheat Gluten - Competition."
The Company's strategy in recent years has been to focus on the marketing
and development of specialty wheat protein and starch products for use in unique
market niches. During 2001, specialty wheat protein sales increased by 24% to
approximately 23% of total wheat protein product sales. As a result of the
expiration of the import quota on foreign wheat gluten, the Company intends to
intensify its efforts to focus on developing markets for its specialty wheat
proteins and starch products. As described herein, the Company is eligible to
receive approximately $26 million over the next two years under a new government
program designed to assist manufacturers of wheat gluten in their transition
from the historical vital wheat gluten business to new markets. These funds will
be used for research, marketing, promotional and capital costs related to
specialty wheat protein and starch products and should help accelerate the
Company's growth in these markets.
For further information, see the Consolidated Financial Statements of the
Company and Management's Discussion and Analysis of the Company's Financial
Condition and Results of Operations which appear at pages 18 through 24 of the
Annual Report.
Wheat Protein Products
The Company's wheat protein products consist of vital wheat gluten and
specialty wheat proteins that are derived from vital wheat gluten. During fiscal
2001, sales of vital wheat gluten declined by approximately 39% over the prior
year due primarily to pricing pressures from subsidized European Union ("E.U.")
producers. As noted above, the Company's overall strategy is to focus on the
marketing and development of specialty wheat protein and starch products for use
in unique market niches., and specialty wheat proteins are accounting for an
increasing share of the Company's total wheat protein sales. During fiscal 2001,
specialty wheat protein sales increased by 24%, to approximately 23% of total
wheat protein sales. That share is expected to continue to increase due to
increased marketing, customer recognition of the advantages of these unique
products and an increase in capacity, as well as declining sales of vital wheat
gluten resulting from an increase in supplies and pricing pressures from
European Union producers.
Vital Wheat Gluten. Vital wheat gluten is a free-flowing light tan powder
which contains approximately 75% to 80% protein. Its vitality, water absorption
and retention and film-forming properties make it desirable as an ingredient in
many food products. It is the only commercially available high protein food
additive which possesses vitality. The vitality of the Company's vital wheat
gluten results from its elastic and cohesive characteristics when added to dough
or otherwise reconstituted with water.
Vital wheat gluten is added by bakeries and food processors to baked goods,
such as breads, and to pet foods, cereals, processed meats, fish, and poultry to
improve the nutritional content, texture, strength, shape, and volume of the
product. The neutral flavor and color of wheat gluten also enhances, but does
not change, the flavor and color of
3
food. The cohesiveness and elasticity of the gluten enables the dough in wheat
and other high protein breads to rise and to support added ingredients, such as
whole cracked grains, raisins and fibers. This allows the baker to make an array
of different breads by varying the gluten content of the dough. Vital wheat
gluten is also added to white breads, hot dog buns and hamburger buns to improve
the strength and cohesiveness of the product. For example, vital wheat gluten
provides greater hinge strength for hot dog buns.
The Company produces vital wheat gluten from modernized facilities at the
Atchison and Pekin plants. It is shipped throughout the continental United
States in bulk and in 50 to 100 pound bags to distributors and also is sold
directly to major food processors and bakeries.
Specialty Wheat Proteins. In recent years the Company began the development
of a number of specialty wheat proteins for food and non-food applications.
Specialty wheat proteins are derived from vital wheat gluten through a variety
of proprietary processes which change the molecular structure of vital wheat
gluten. Food application wheat proteins include gliadin, glutenin, products in
the Wheatex(TM) and FP(TM) series and Pasta Power(TM). Non-food applications
include wheat proteins designed for use primarily in cosmetics and personal care
products and in biodegradable gluten protein that can be molded to form a
variety of biodegradable plastic-like objects. Specialty wheat proteins
generally compete with other ingredients and modified proteins having similar
characteristics. Although a number of the specialty wheat proteins have been
launched, additional products are in the test marketing or development stage.
Food Applications
o Gliadin and Glutenin are the two principal molecules that make up vital
wheat gluten. The Company's patented process enables the separation of
each for a variety of end uses. Glutenin, a large molecule responsible
for the elastic character of vital wheat gluten, increases the strength
of bread doughs, improves the freeze-thaw characteristics of frozen
doughs and may be used as a functional protein source in beef jerky-type
products, as well as in meat extension. Gliadin, the smaller of the two
molecules, is soluble in water and other liquids, including alcohol, and
is responsible for the viscous properties of wheat gluten. Those
characteristics make it ideal to improve the texture of noodles and
pastas. Gliadin is also used in a number of cosmetics and personal care
products as described below under "Non-Food Applications."
o Wheatex(TM)Series consists of texturized wheat proteins made from vital
wheat gluten by changing it into a pliable substance through special
processing. The resulting solid food product can be further enhanced with
flavoring and coloring and reconstituted with water. Texturized wheat
proteins are used for meat, poultry and fish substitutes, extenders and
binders. Wheatex(TM)mimics the textural characteristics and appearance of
meat, fish and poultry products. It is available in a variety of sizes
and colors and can be easily formed into patties, links or virtually any
other shape the customer requires. Because of its neutral taste,
Wheatex(TM)will not alter flavors that are added to the product. It also
has excellent water-binding capacities for the retention of natural meat
juices. Wheatex(TM)is presently being sold for applications in vegetarian
and extended meat products.
o FP(TM) Series. The Midsol FP(TM) series of products consist of specialty
wheat proteins, each tailored for use in a variety of food applications.
These include proteins that can be used to form barriers to fat and
moisture penetration to enhance the crispness and improve batter adhesion
in fried products, increase the freshness and shelf life of frozen and
refrigerated dough products after they are baked, effectively bond other
ingredients in vegetarian patties and extended meat products, and fortify
nutritional drinks.
o Pasta Power(TM) is a specialty wheat protein that is a cost-effective
replacement for whole eggs and egg whites and enhances the strength,
texture, quality and functionality of fresh, frozen and flavored pasta
products. The added strength enables the canning of pasta and its
treatment with spices without significant deterioration of the noodle or
other pasta product, as in the case of canned spaghetti and similar
products.
4
Non-Food Applications
o Cosmetics and Personal Care Products. Specialty wheat proteins include
proteins that have been hydrolyzed or otherwise altered to become soluble
in water and other liquids. This enables their use in food as well as
non-food cosmetic applications such as hair sprays, shampoos, skin
lotions and similar products. These include Foam Pro(TM), a hydrolyzed
wheat protein that has been developed as a foam booster to naturally
enhance detergent systems such as shampoos, liquid hand soaps and bath
and shower gels; Aqua Pro(TM)II WAA, a solution of amino acids produced
from natural wheat proteins that helps provide excellent moisturizing and
film forming properties in both hair and skin systems; Aqua Pro(TM)11 WP,
an additive for shampoo; Aqua Pro(TM)QWL, which enhances the
functionality of hair conditioners; and Aqua Pro(TM)II WG, which is a
gliadin formulation that is used in hair and skin cleansers and
conditioners.
o Biodegradable Gluten/Starch Resins. Polytriticum(TM) 200 and
Polytriticum(TM) 2000 are the Company's environmentally friendly
biodegradable gluten/starch resins that can be molded to produce a
variety of plastic-like objects. Polytriticum(TM) 200 may be used as a
commercial raw material for the production of pet treats and chews.
Polytriticum(TM) 2000 has been developed for use in disposable eating
utensils, golf tees, food and feed containers and similar type vessels.
In February of 2001, the Company acquired a state-of-the-art facility in
Kansas City, Kansas for $6.5 million which is principally dedicated to producing
Wheatex(TM). The acquisition has allowed the Company to forego earlier plans to
construct a Wheatex(TM) plant at a similar cost. The Company expects the
acquisition will allow it to increase the production of textured wheat proteins
and bio-polymers at an accelerated rate. Also, the Company anticipates that in
addition to providing more space than was incorporated into the design for a new
plant, the facility will provide greater flexibility for producing other lines
of value-added specialty wheat proteins.
In July of 2001, the Company received the first $17 million out of an
expected total of approximately $26 million that it has been awarded under a
Bush Administration program intended to enable the gluten industry to move
forward in the face of subsidized and protected competition from the European
Union. See "Competition - Vital Wheat Gluten". The Company will use the funds to
pay certain capital, research, marketing and promotional costs incurred in
developing products and markets for value-added wheat gluten, or wheat protein,
and wheat starch products.
The Company believes that its wheat protein processing operations produce a
quality of vital wheat gluten and specialty wheat proteins that are equal to or
better than that of any others on the market. The Company's location in the
center of the United States grain belt, its production capacity and years of
operating experience, enable it to provide a consistently high level of service
to customers.
Competition-Vital Wheat Gluten. The Company's principal competitors in the
U.S. vital wheat gluten market consist primarily of three other domestic
producers and producers in the E.U., Australia and certain other regulated
countries (the "Foreign Exporters"). Between June 30, 1994 and June 30, 1998,
the E.U. took an increasingly large share of the U.S. gluten market. Imports of
wheat gluten shipped into the United States from the E.U. during the crop year
ended June 30, 1995, were approximately 51.9 million pounds. Those imports
increased to 70.2 million pounds in the crop year ending June 30, 1996, to 91.1
million pounds in the crop year ending June 30, 1997, and to 97.5 million pounds
in the crop year ending June 30, 1998, for an aggregate increase of 88%. Due to
the imposition of import quotas beginning on June 1, 1998, U.S. Customs data
shows that E.U. imports declined to 65.5 million pounds in the quota year ending
May 31, 1999, to 45.8 million pounds (excluding Poland) for the quota year
ending May 31, 2000, but increased to 61.9 million pounds for the quota year
ending May 31, 2001. Because the quota has expired, as discussed below, the
Company expects that future imports will approach or exceed pre-quota levels and
that U.S. producers will have difficulty effectively competing with subsidized
producers in the sale of vital wheat gluten.
Vital wheat gluten is considered a commodity and therefore competition is
based primarily upon price. Since the increasing surge of large, subsidized
volumes of E.U. wheat gluten into the U.S., vital wheat gluten prices have been
primarily affected by (i) excess E.U. capacity, (ii) high tariff barriers,
subsidies and other protective measures ("Subsidies") provided to E.U. exporters
by their host governments, (iii) low U.S. tariffs and (iv) gluten import quotas.
5
The Subsidies and low U.S. tariffs encouraged E.U. producers to expand wheat
starch and wheat gluten production capacity and to continue the development of
even greater capacities. Based on industry sources, from January 1, 1998 through
December 31, 2000, an estimated 160 million pounds of additional E.U. capacity
were completed. Additional capacity may have been added subsequently. In light
of the expiration of the import quota on vital wheat gluten, it is expected that
a majority of the excess wheat gluten production from these plants will be
targeted for shipment to the U.S.
The Wheat Gluten Industry Council of the United States, of which the
Company is a principal supporter, has engaged in a number of initiatives to
combat the surge in subsidized E.U. wheat gluten. Initially, the Wheat Gluten
Industry Council attempted to establish equal opportunity, or a "level playing
field", in the U.S. market through negotiations under a Grains Agreement between
the E.U. and the United States. A lack of meaningful discussions was followed by
an action under Section 301 of the Trade Act of 1974. Following a further round
of unsatisfactory discussions in connection with that action, the Wheat Gluten
Council initiated a second proceeding on September 19, 1997, with the
International Trade Commission of the United States under section 201 of the
Trade Act of 1974 (the "Section 201 Proceeding").
The Section 201 Proceeding met with success during the second half of
fiscal 1998. On March 18, 1998, the International Trade Commission submitted to
President Clinton a unanimous affirmative determination that imports of wheat
gluten were being imported into the United States in such increased quantities
as to be a substantial cause of serious injury to the domestic industry. The
International Trade Commission also recommended to the President that a quota be
placed on imports of foreign wheat gluten. As a result of that finding and
recommendation and pursuant to Section 203 of the Trade Act of 1974, the
President issued Proclamation 7103 on May 30, 1998. The Proclamation imposed
annual quantitative limitations for three years on imports of wheat gluten from
the E. U. and other Foreign Exporters at an amount equal to the total average
imports of wheat gluten shipped into the United States by the Foreign Exporters
during the three crop years ended June 30, 1995. The aggregate quota for the
first year was 126.8 million pounds. Annual increases in that quota of six
percent prevailed in the second year and in the third year. Due to violations of
the quota by the E.U. during the first quota year, the President issued a
proclamation on May 29, 1999, that reduced the E.U.'s second year quota by the
amount of illegally shipped gluten in the first year and placed in effect other
measures designed to preclude further violations. Due to the importation of the
EU's entire annual amount allowed in the first quarter of the second quota year
and the shipment of large quantities of gluten through Poland (a previously
exempt country), the President in May 2000, took further action. That action
restricted shipment of the annual amount to one fourth of the annual amount in
each of the four quarters of the quota year. The action removed Poland from the
list of exempted countries. The quotas for "goods entered, or withdrawn from
warehouse for consumption, on or after June 1, 2000" in millions of pounds were,
per quarter, beginning June 1, 2000:
Per Quarter
--------------------
Australia 17.525 million pounds
European Community 15.175 million pounds
Other Countries 2.925 million pounds
In fiscal 2000, a proceeding was commenced in the World Trade Organization
("WTO") to set aside the action of the ITC in establishing the quota. The
essential basis of the claim was that the ITC and the President had not used the
appropriate methodology in determining the cause of serious injury to the U.S.
industry. Subsequently, the EU imposed a special duty on a portion of imports of
corn gluten from the United States. On June 28, 2000, the WTO dispute resolution
panel ruled in favor of the claim. The decision was appealed by the U.S. Trade
Representative.
On appeal, the Appellate Body of the World Trade Organization ("WTO")
confirmed the ruling that the safeguard action implementing the quota was
inconsistent with the United States' obligations under the WTO Agreement on
Safeguards. However, the U.S. International Trade Commission ("USITC") had the
opportunity to bring the safeguard into conformity with the Appellate Body
decision, and the quota remained in place until its scheduled May 31, 2001
termination date.
At the request of the Wheat Gluten Industry Council of the U.S., the USITC
recommended a two-year extension of the quota, based on grounds that through
circumvention and similar tactics, E.U. producers had deliberately
6
and effectively prevented the U.S. wheat gluten industry from receiving the full
extent of relief that the quota intended. However, in lieu of extending the
quota, the Bush Administration announced a program to provide the wheat gluten
industry up to $40 million over two years to help it complete its transition to
competitiveness. The Company is eligible for approximately $26 million of the
total industry allotment and has received approximately $17 million for the
first year of the program. The program is administered through the U.S.
Department of Agriculture's Commodity Credit Corporation.
Since the imposition of the quota, the Company has focused its efforts on
developing and increasing the production and sales of specialty wheat proteins.
These are niche products that are expected to be able to compete more
effectively with increased foreign imports. Although additional quota relief
would have been helpful, the Commodity Credit program supports the Company's
strategy and should strengthen its efforts to move increasingly into the
development, production and marketing of value added wheat proteins and
starches. However, there can be no assurance that the Company will be able to
compete effectively in a market that is inundated with low cost, subsidized
foreign gluten.
The Company's sales of vital wheat gluten during 2001 declined
approximately 39% below gluten sales in fiscal 2000 as the Company reduced
production due to increased pricing pressures from subsidized E.U. producers.
Premium Wheat Starch
Wheat starch constitutes the carbohydrate-bearing portion of wheat flour.
The Company produces a pure white premium wheat starch powder by extracting the
starch from the starch slurry, substantially free of all impurities and fibers,
and then by spray, flash or drum drying the starch. Premium wheat starch differs
from low grade or B wheat starches, which are extracted along with impurities
and fibers and are used primarily as a binding agent for industrial
applications, such as the manufacture of charcoal briquettes. The Company does
not produce low grade or B starches because its integrated processing facilities
are able to process the slurry remaining after the extraction of premium wheat
starch into alcohol, animal feed and carbon dioxide. Premium wheat starch
differs from corn starch in its granular structure, color, granular size and
name identification.
A substantial portion of the Company's premium wheat starch is also altered
during processing to produce certain unique modified and specialty wheat
starches designed for special applications in niche markets.
The Company's premium wheat starches are used primarily as an additive in a
variety of food products to affect their appearance, texture, tenderness, taste,
palatability, cooking temperature, stability, viscosity, binding and freeze-thaw
characteristics. Important physical properties contributed by wheat starch
include whiteness, clean flavor, viscosity and texture. For example, the
Company's starches are used to improve the taste and mouth feel of cream puffs,
eclairs, puddings, pie fillings, breadings and batters; to improve the size,
symmetry and taste of angel food cakes; to alter the viscosity of soups, sauces
and gravies; to improve the freeze-thaw stability and shelf life of fruit pies
and other frozen foods; to improve moisture retention in microwavable foods; and
to add stability and to improve spreadability in frostings, mixes, glazes and
sugar coatings. The Company's modified and specialty starches are also sold for
a number of industrial and non-food applications, which include uses in the
manufacture of adhesives, paper coatings and carbonless paper.
The Company's premium wheat starch is sold nationwide to food processors
and distributors and for export, with the bulk of international sales going to
Japan, Mexico and East Asian countries which do not have wheat-based economies.
The Company believes that it is the largest producer of premium wheat
starch in the United States. Although wheat starch enjoys a relatively small
portion of the total United States starch market, the market is one which has
experienced substantial growth over the years. Growth in the wheat starch market
reflects a growing appreciation for the unique characteristics of wheat starch
which provide it with a number of advantages over corn and other starches for
certain baking and other end uses. The Company has developed a number of
different modified and specialty wheat starches, and continues to explore the
development of additional starch products with the view to increasing sales of
value added modified and specialty starches.
7
Premium wheat starch competes primarily with corn starch, which dominates
the United States market. Competition is based upon price, name, color and
differing granular and chemical characteristics which affect the food product in
which it is used. Premium wheat starch prices usually enjoy a price premium over
corn starches and low grade wheat starches. Wheat starch price fluctuations
generally track the fluctuations in the corn starch market, except in the case
of modified and specialty wheat starches. The wheat starch market also usually
permits pricing consistent with costs which affect the industry in general,
including increased grain costs. The Company's strategy is to market its premium
wheat starches in special market niches where the unique characteristics of
premium wheat starch or one of the Company's modified and specialty wheat
starches are better suited to a customer's requirements for a specific use.
Starch sales for 2001 declined slightly from those of 2000; a modest
decline in volume offset minimal price increases for the Company's starches.
Alcohol Products
The Company's Atchison and Pekin plants process corn and milo, mixed with
the starch slurry from gluten and starch processing operations, into food grade
alcohol, fuel grade alcohol, animal feed and carbon dioxide.
Food grade alcohol, or grain neutral spirits, consists of beverage alcohol
and industrial food grade alcohol that are distilled to remove all impurities
and all but approximately 5% of the water content to yield high quality 190
proof alcohol. Fuel grade alcohol, or "ethanol," is a lower grade of grain
alcohol that is distilled to remove all water to yield 200 proof alcohol
suitable for blending with gasoline.
Food Grade Alcohol
Beverage Alcohol Food grade beverage alcohol consists primarily of grain
neutral spirits and gin. Grain neutral spirits is sold in bulk or processed into
vodka and gin and sold in bulk quantities at various proof concentrations to
bottlers and rectifiers, which further process the alcohol for sale to consumers
under numerous labels.
The Company believes that in terms of fiscal 2001 net sales, it is one of
the three largest bulk sellers of grain neutral spirits, vodka and gin in the
United States. The Company's principal competitors in the beverage alcohol
market are Grain Processing Company of Muscatine, Iowa and Archer Daniels
Midland of Decatur, Illinois. Beginning in 1997, competition in beverage markets
increased significantly as producers of fuel grade alcohol converted portions of
fuel grade production into food grade production. Competition is based primarily
upon price and service, and in the case of gin, formulation. The Company
believes that the centralized location of its Illinois and Kansas distilleries
and the capacity of its dual production facilities combine to provide the
Company with a customer service advantage within the industry.
Food Grade Industrial Alcohol Food grade alcohol which is not sold as
beverage alcohol is marketed as food grade industrial alcohol. Food grade
industrial alcohol is sold as an ingredient in foods (e.g., vinegar and food
flavorings), personal care products (e.g., hair sprays and deodorants), cleaning
solutions, biocides, insecticides, fungicides, pharmaceuticals, and a variety of
other products. Although grain alcohol is chemically the same as petroleum-based
or synthetic alcohol, certain customers prefer a natural grain-based alcohol.
Food grade industrial alcohol is sold in tank truck or rail car quantities
direct to a number of industrial processors from both the Atchison and Pekin
plants.
The Company is a minor competitor in the total United States market for
food grade industrial alcohol, which is dominated by petroleum-based or
synthetic alcohol. Food grade industrial alcohol prices are normally consistent
with prices for synthetic industrial alcohol.
Food grade industrial and beverage alcohol sales increased by approximately
$2.2 million during 2001 over 2000. Improved selling prices more than offset
declined unit volume which resulted largely from the Company's decision to
reduce export sales.
8
During the year, the Company took several initiatives to improve alcohol
production. In the first quarter of the fiscal year, the Company completed the
installation of new distillery columns to replace older equipment at its
Atchison, Kansas plant, which permit the realization of improved food grade
alcohol production efficiencies at that location. During the third quarter, the
Company's Board of Directors approved a $2.1 million distillery improvement
project at the Atchison plant. Expected to be completed early in the third
quarter of 2002, the project is designed to enhance the Company's production
capabilities for both food grade and fuel grade alcohol. In June 2001, the Board
of Directors approved a plan for installation of a new feed drier at the
Company's Pekin, Illinois plant. Expected to be completed in late fiscal 2002 at
a cost of approximately $5 million, the new drier should improve alcohol
production efficiencies at the Pekin plant.
Fuel Grade Alcohol
Fuel grade alcohol, which is commonly referred to as ethanol, is sold
primarily for blending with gasoline to increase the oxygen and octane levels of
the gasoline. As an octane enhancer, ethanol can serve as a substitute for lead
and petroleum based octane enhancers. As an oxygenate, ethanol permits gasoline
to meet certain environmental regulations and laws that regulate air quality by
reducing carbon monoxide, hydrocarbon particulates and other toxic emissions
generated from the burning of gasoline ("toxics"). Because ethanol is produced
from grain, a renewable resource, it also provides a fuel alternative that tends
to reduce the country's dependence on foreign oil.
Although ethanol can be blended directly with gasoline as an oxygenate to
enable it to reduce toxic air emissions, it also increases the volatility of
gasoline or its tendency to evaporate and release volatile organic compounds
("VOC's"). This latter characteristic has precluded it from meeting certain
Clean Air Act requirements for gasoline that pertain to nine of the smoggiest U.
S. metropolitan areas during the summer months (May 1 through September 15). As
a consequence, the demand for ethanol typically increases during the period from
August through March of each fiscal year as gasoline blenders acquire stocks for
blending with gasoline to be marketed in the period September 16 through April
30.
Since the adoption of the Clean Air Act, the gasoline industry has relied
primarily upon methyl tertiary butyl ether (MTBE) to reduce toxic emissions of
air pollutants to meet the requirements of the Act and related EPA regulations.
Ethanol is also used to a lesser extent during the cooler months of the year.
However, the EPA has recently concluded that the use of MTBE has created a
"significant and unacceptable risk to drinking water and ground water
resources." Concerns have also been raised as to the effectiveness of MTBE
versus the effectiveness of Ethanol as a reducer of air pollutants. As the
result of these concerns, the EPA commissioned a "Blue Ribbon Panel" to
investigate the matter and recommend solutions. In March 2000, the EPA announced
the recommendations of the Panel. The recommendations propose that the Clean Air
Act be amended to provide the EPA with authority to significantly reduce or
eliminate the use of MTBE, and to "replace the 2 percent oxygenate requirement
in the Clean Air Act with a renewable fuel annual average content for all
gasoline at a level that maintains the current level of renewable fuel (1.2
percent of the gasoline supply) and allows for sustained growth over the next
decade ."
Several states also have begun to take action to curb the use of MTBE,
including California, which has adopted regulations that will require a phase
out of the use of MTBE in that state by January 1, 2003. Based upon information
published by the Renewable Fuels Association, other states that have taken steps
to restrict or ban MTBE over the next few years include Arizona, Connecticut,
Michigan and New York. In June of 2001, the Bush Administration denied
California's request for a waiver from the clean octane provisions of the Clean
Air Act that require oxygenates in gasoline. As a result of such actions, the
Company expects that both the demand for ethanol and the capacity of the ethanol
industry will expand in the future. According to the Renewable Fuels
Association, projected annual industry production capacity is expected to grow
to 3.5 billion gallons by the end of 2003, up from the current estimated
industry capacity of 2 billion gallons.
The cost of producing ethanol has historically exceeded the cost of
producing gasoline and gasoline additives, such as MTBE, all of which are
derived from fossil non-renewable fuels such as petroleum. Accordingly, to
encourage the production of ethanol for use in gasoline, the Federal government
and various states have enacted tax and other incentives designed to make
ethanol competitive with gasoline and gasoline additives. In December, 2000, the
U.S. Department of Agriculture initiated a program to provide a two-year cash
incentive for ethanol producers who increase
9
their grain usage by specifiedamounts to raise fuel alcohol production. The
Company expects to meet the program's eligibility requirements and has increased
alcohol production in the fuel area in response to the program.
Under the internal revenue code, and until the end of 2007, gasoline that
has been blended in qualifying proportions with ethanol provide sellers of the
blend with certain income tax credits and excise tax reductions that amount to
up to $0.54 per gallon of ethanol that is mixed with the gasoline (the "Federal
Tax Credit"). A mix of at least 10% ethanol by volume is required to receive the
maximum credit. Although the Federal Tax Credit is not directly available to the
Company, it allows the Company to sell its ethanol at prices competitive with
less expensive additives and gasoline. From time to time legislation is proposed
to eliminate, reduce or extend the tax benefits enjoyed by the ethanol industry,
and indirectly by producers of the grain that is converted into ethanol. During
1998 legislation was enacted that extended the credit through 2007, with the
credit being reduced to $0.51 per gallon beginning in 2005.
The Kansas Qualified Agricultural Ethyl Alcohol Producer Incentive Fund,
which has been extended to 2011, provides incentives for sales of ethanol
produced in Kansas to gasoline blenders. However, after 2004 incentives will be
paid only for increased production. Fiscal 2001 payments to the Company out of
the fund totaled $360,000 for the ethanol produced by the Company at the
Atchison plant during that year.
The fuel grade alcohol market is dominated by Archer Daniels Midland, with
the Company being the smaller of a few other larger second tier ethanol
producers. The Company competes with other producers of fuel grade alcohol on
the basis of price and delivery service.
Fuel grade alcohol sales increased by approximately $21.6 million, or 35%,
during 2001, due primarily to increased volume and prices throughout the year.
Alcohol By-Products
The bulk of fiscal 2001 sales of alcohol by-products consisted of
distillers feeds. Distillers feeds are the residue of corn, milo and wheat from
alcohol processing operations. The residue is dried and sold primarily to
processors of animal feeds as a high protein additive. The Company competes with
other distillers of alcohol as well as a number of other producers of animal
food additives in the sale of distillers feeds and mill feeds.
The balance of alcohol by-products consists primarily of carbon dioxide.
During the production of alcohol, the Company traps carbon dioxide gas that is
emitted in the fermentation process. The gas is purchased and liquefied on site
by two principal customers, one at the Atchison Plant and one at the Pekin
Plant, who own and operate the carbon dioxide processing and storage equipment
under long term contracts with the Company. The liquefied gas is resold by these
processors to a variety of industrial customers and producers of carbonated
beverages.
Sales of alcohol by-products during fiscal 2001 increased by 2% relative to
2000 sales, due primarily to increased volume resulting from increased alcohol
production.
Flour and Other Mill Products
The Company owns and operates a flour mill at the Atchison plant. The
mill's output of flour is used internally to satisfy a majority of the raw
material needed for the production of vital wheat gluten and premium wheat
starch.
In addition to flour, the wheat milling process generates mill feeds or
"midds." Midds are sold to processors of animal feeds as a feed additive.
Transportation
The Company's output is transported to customers by truck, rail and barge
transportation equipment, most of which is provided by common carriers through
arrangements made by the Company. The Company leases 329 rail cars which may be
dispatched on short notice. Shipment by barge is offered to customers through
barge loading facilities on the Missouri and Illinois Rivers. The barge facility
on the Illinois River is adjacent to the Pekin plant and owned by
10
the Company. The facility on the Missouri River, which is not company-owned, is
approximately one mile from the Atchison plant.
Raw Materials
The Company's principal raw material is grain, consisting of wheat, which
is processed into all of the Company's products, and corn and milo, which are
processed into alcohol, animal feed and carbon dioxide. Grain is purchased
directly from surrounding farms, primarily at harvest time, and throughout the
year from grain elevators. Historically, the cost of grain is subject to
substantial fluctuations depending upon a number of factors which affect
commodity prices in general, including crop conditions, weather, government
programs, and purchases by foreign governments. Such variations in grain prices
have had and are expected to have from time to time significant adverse effects
on the results of the Company's operations. This is primarily due to a variety
of factors. From time to time it has been difficult for the Company to
compensate for increases in grain costs through adjustments in prices charged
for the Company's vital wheat gluten due to the surge of subsidized E.U. wheat
gluten, whose artificially low prices are not affected by such costs. Now that
the quota has been lifted, the Company expects it will be more difficult to do
so. Also, fuel grade alcohol prices, which historically have tracked the cost of
gasoline, do not usually adjust to rising grain costs.
During fiscal 2001, market prices for grain remained reasonable. The
average Kansas City market price per bushel for corn and milo was $1.88 during
2001 and $1.87 during 2000, while the average Kansas City market price for a
bushel of wheat was $2.87 during 2001 versus $2.59 during 2000.
The Company engages in the purchase of commodity futures to hedge economic
risks associated with fluctuating grain and grain products prices. During fiscal
2001, the Company hedged approximately 19% of corn processed, compared to 11% in
2000, and 9% of wheat processed, compared to 22% in 2000. The contracts are
accounted for as hedges and, accordingly, gains and losses are deferred and
recognized in cost of sales as part of contract costs when contract positions
are settled and related products are sold. For fiscal 2001, raw material costs
included a net loss of approximately $1.2 million on contracts settled during
the year compared to a net loss of $1.3 million for fiscal 2000. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Market Risk" in the Annual Report.
Energy
Because energy comprises a major cost of operations, the Company seeks to
assure the availability of fuels for the Pekin and Atchison plants at
competitive prices. This proved a difficult challenge in fiscal 2001, as
exorbitant energy costs plagued the Company during a substantial portion of the
year, especially during the third quarter. For the year as a whole, the
Company's utility costs were 45% higher than the prior year. Although prices
have declined recently, during the fourth quarter they were 27% higher than the
comparable quarter in the prior year.
All of the natural gas demand for the Atchison plant is procured in the
open market from various suppliers. Depending on existing market conditions, the
Company has the ability to transport the gas through a gas pipeline owned by a
wholly-owned subsidiary of the Company. The Atchison boilers may also be oil
fired.
In 1995 the Company entered into a long-term arrangement with an Illinois
utility to satisfy the energy needs of the Pekin, Illinois plant. Under the
arrangement, the utility constructed a new gas fired electric and steam
generating facility on ground leased from the Company. The utility sells steam
and electricity to the Company, generally at fixed rates, using gas procured by
the Company.
In order to control energy costs, the Company has a risk management program
whereby at pre-determined prices, the Company will purchase a portion of its
natural gas requirements for future delivery.
Employees
As of June 30, 2001, the Company had 416 employees, 268 of whom are covered
by two collective bargaining agreements with one labor union. One agreement,
which expires on August 31, 2002, covers 178 employees at the
Atchison Plant.
The other agreement, which expires in November 2002, covers 90 employees at the
Pekin plant. As of June 30, 2000, the Company had 433 employees.
The Company considers its relations with its personnel to be good and has
not experienced a work stoppage since 1978.
Regulation
The Company's beverage and industrial alcohol business is subject to
regulation by the Bureau of Alcohol, Tobacco and Firearms ("BATF") and the
alcoholic beverage agencies in the States of Kansas and Illinois. Such
regulation covers virtually every aspect of the Company's alcohol operations,
including production facilities, marketing, pricing, labeling, packaging, and
advertising. Food products are also subject to regulation by the Food and Drug
Administration. BATF regulation includes periodic BATF audits of all production
reports, shipping documents, and licenses to assure that proper records are
maintained. The Company is also required to file and maintain monthly reports
with the BATF of alcohol inventories and shipments.
The Company is subject to extensive environmental regulation at the
federal, state and local levels. The regulations include the regulation of water
usage, waste water discharge, disposal of hazardous wastes and emissions of
volatile organic compounds, particulates and other substances into the air.
Under these regulations the Company is required to obtain operating permits and
to submit periodic reports to regulating agencies. During 1997 the Illinois
Environmental Protection Agency commenced an action against the Company with
respect to alleged noncompliance of the Pekin Plant with certain air quality
regulations. This action is further described under "Item 3. Legal Proceedings."
The Company has submitted an application to the Agency for construction of new
pollution control equipment that is expected to bring emissions into compliance
with all applicable regulations.
Item 2. Properties.
The Company maintains the following principal plants, warehouses and
office facilities:
Plant Area Tract Area
Location Purpose (in sq. ft.) (in acres)
-------- ------- ------------ ----------
Atchison, Kansas.. Principal executive offices, 494,640 25
grain processing, warehousing,
and research and quality
control laboratories.
Kansas City, Kansas Specialty protein and starch 83,200 12.5
mixing facility and warehouse
Pekin, Illinois Grain processing, warehousing, 462,926 49
and quality control laboratories.
The facilities mentioned above are generally in good operating condition,
are currently in normal operation, are generally suitable and adequate for the
business activity conducted therein, and have productive capacities sufficient
to maintain prior levels of production. The Atchison and Pekin facilities are
owned and the Kansas City facility is leased from the Unified Government of
Wyandotte County, Kansas City, Kansas pursuant to an industrial revenue bond
financing consummated in August 2001. The Company has entered into loan
agreements which contain covenants that limit its ability to pledge its
facilities to others. The Company also owns transportation equipment and a gas
pipeline described under Transportation and Energy.
12
Item 3. Legal Proceedings.
On April 13, 1997, an administrative proceeding was filed against the
Company's Illinois subsidiary before the Illinois Pollution Control Board (the
"Board"), by the Illinois Attorney General on behalf of the Illinois
Environmental Protection Agency (the "Agency"). The proceeding relates to the
Company's installation and operation of two feed dryers at its facility in
Pekin, Illinois. The Complaint alleges that the dryers exceed the particulate
emission limitations specified in the construction permits for the units; that
the dryers are being operated without operating permits; and that the dryers
were constructed without a Prevention of Significant Deterioration (PSD)
construction permit setting forth a best available control technology ("BACT")
emission limitation. The Complaint seeks a Board order ordering the Company to
cease and desist from violations of the Illinois Environmental Protection Act
and associated regulations, assessing a civil penalty, and awarding the state
its attorneys fees.
The Company has filed an Answer before the Board admitting that compliance
tests have shown particulate emissions in excess of the limits set forth in the
construction permits, but denying the remainder of the State's claims. Since the
time operational problems were discovered with the dryers' pollution control
equipment, the Company has been conferring and negotiating with the Agency on
the issues involved in the Complaint. The Company and the Agency have been
conducting air modeling to support the construction of new pollution control
equipment for the dryers, at an estimated cost of approximately $1.0 million. It
is anticipated that the new equipment will bring emissions into compliance with
all applicable limitations. Once the modeling is complete, the Company expects
to obtain permission from the Agency to construct this equipment.
Proceedings under the Complaint are being held in abeyance by agreement of
the parties pending completion of the air modeling and completion of the
Company's compliance activities. Once compliance has been achieved, the Company
anticipates negotiating a settlement of the remainder of the State's claims.
Based on the circumstances and a preliminary review of decisions by the Board in
air pollution matters, the Company does not believe that any such settlement
will be material to the business or financial condition of the Company.
There are no other legal proceedings pending as of June 30, 2001 which the
Company believes to be material. Legal proceedings which are pending, including
the proceeding with the Illinois Environmental Protection Agency described
above, are believed by the Company to consist of matters normally incident to
the business conducted by the Company and taken together do not appear material.
Item 4. Submissions of Matters to a Vote of Security Holders.
No matters have been submitted to a vote of stockholders during the fourth
quarter of fiscal year covered by this report.
13
Item 4A. Executive Officers of the Registrant.
Executive officers of the Company are as follows:
Name Age Position
- ---- --- --------
Cloud L. Cray, Jr. 78 Chairman of the Board
Laidacker M. Seaberg 55 President, Chief Executive Officer
Sukh Bassi, Ph.D. 60 Vice President, Research and Development
Robert G. Booe 64 Vice President, Finance and Administration.
Controller, Treasurer and Chief Financial
Officer
Gerald Lasater 63 Vice President, Export Marketing and Sales
Marta L. Myers 41 Secretary and Administrative Assistant to the
President
Steven J. Pickman 48 Vice President, Corporate Relations
David E. Rindom 46 Vice President, Human Resources
Randy M. Schrick 51 Vice President, Operations
Dennis E. Sprague 55 Vice President, Alcohol and Feed Products
Marketing and Sales
William R. Thornton 49 Vice President, Quality Management
Michael J. Trautschold 53 Executive Vice President, Marketing and Sales
Mr. Cray, Jr. has served as Chairman of the Board since 1980. He served as
Chief Executive Officer from 1980 to September, 1988, and has been an officer of
the Company and its affiliates for more than thirty years.
Mr. Seaberg joined the Company in 1969 and has served as the President of
the Company since 1980 and as Chief Executive Officer since September, 1988. He
is the son-in-law of Mr. Cray, Jr.
Dr. Bassi has served as Vice President of Research and Development since
1985, and Vice President Specialty Ingredients Marketing and Sales between 1998
and 2000. He previously served as Technical Director from 1989 to 1998 and Vice
President - Vital Wheat Gluten Marketing from 1992 to 1998. From 1981 to 1992 he
was Manager of the Vital Wheat Gluten Strategic Business Unit. He was previously
a professor of biology at Benedictine College for ten years.
Mr. Booe has served as Vice President, Treasurer and Chief Financial
Officer of the Company since 1988. He joined the Company in 1966 as its
Treasurer and became the Controller and Treasurer in 1980. In 1992 he was
assigned the additional task of Vice President - Administration.
Mr. Lasater joined the Company in 1962. He has served as Vice President -
Export Marketing and Sales since 1998. Previously, he served as Vice President -
Starch Marketing from 1992 to 1998. Prior to that he served as Vice President in
charge of the Wheat Starch Strategic Business Unit.
Ms. Myers joined the Company in 1996. She has served as Secretary since
October 1996 and as Administrative Assistant to the President since 1999.
Previously she was executive secretary for Superintendent of
14
Schools for Unified School District 409, Atchison, Kansas.
Mr. Pickman joined the Company in 1985. He has served as Vice President,
Corporate Relations since June, 2000. Previously he was Executive Director of
Corporate Relations from 1999 to June 2000 and prior to that Corporate Director
of Public and Investor Relations. Between 1985 and 1989 he served as the
Director of Public Relations and Marketing Administration for the Company's
former subsidiary, McCormick Distilling Company, Weston, Missouri.
Mr. Rindom joined the Company in 1980. He has served as Vice President,
Human Resources since June 2000. He was Corporate Director of Human Relations
from 1992 to June 2000, Personnel Director from 1988 to 1992 and Assistant
Personnel Director from 1984 to 1988.
Mr. Schrick, a Director since 1987, joined the Company in 1973. He has
served as Vice President - Operations since 1992. From 1984 to 1992 he served as
Vice President and General Manager of the Pekin plant. From 1982 to 1984 he was
the Plant Manager of the Pekin Plant. Prior to 1982, he was Production Manager
at the Atchison plant.
Mr. Sprague joined the Company in October 1998. He has served as Vice
President, Alcohol and Feed Products since June, 2000. Previously, he served as
Vice President, Corporate Marketing and Sales. Prior to joining the Company, he
held a variety of management, sales and plant operations positions with Joseph
E. Seagrams & Sons, Inc.
Mr. Thornton joined the Company in 1994. He has served as Vice President of
Quality Management since June 2000. He was Corporate Director of Quality
Management from 1997 to June 2000 and Corporate Director of Continuous Quality
Improvement from 1994 to 1997.
Mr. Trautschold joined the Company in September 2000. He has served since
then as Executive Vice President of Marketing and Sales. He was Vice President
of Product Strategy in the Consumer direct Division of Schwan's Sales
Enterprises, Inc. from 1999 to September 2000 and Vice President of Corporate
Marketing Services for ConAgra, Inc. prior to that time.
15
PART II
Item 5. Market for Registrants Common Equity and Related Stockholders Matters.
The Common Stock of the Company has been traded on the NASDAQ National
Market System under the symbol MWGP since November 1988.
The following table below reflects the high and low closing prices of the
Common Stock for each quarter of fiscal 2001 and 2000. The Company paid a cash
dividend of $.10 per share in November 2000. The Board of Directors has declared
a dividend of $.15 per share payable on November 6, 2001 to stockholders of
record on October 11, 2001. Previously, cash dividends had not been paid since
the end of 1995. Any future dividends will be paid at the discretion of the
Board of Directors, which will consider various factors, including the Company's
operating results and cash requirements, in making any decision respecting
dividends.
Sales Price
High Low
2001:
First Quarter $ 11.00 $ 8.25
Second Quarter 10.25 8.75
Third Quarter 9.00 8.25
Fourth Quarter 11.25 8.13
2000:
First Quarter $ 11.50 $ 9.38
Second Quarter 9.75 7.00
Third Quarter 9.25 6.38
Fourth Quarter 8.63 6.13
At June 30, 2001 there were approximately 787 holders of record of the
Company's Common Stock. It is believed that the Common Stock is held by
approximately 1960 beneficial owners.
Item 6. Selected Financial Data.
Incorporated by reference to the information under "Selected Financial
Information" on page 17 of the Annual Report, a copy of which page is included
in Exhibit 13 to this Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Incorporated by reference to the information under "Managements Discussion
and Analysis of Financial Condition and Results of Operations" on pages 18
through 24 of the Annual Report, copies of which pages are included in Exhibit
13 to this Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Incorporated by reference to the information under "Managements Discussion
and Analysis of Financial Condition and Results of Operations - Market Risk" on
page 23 of the Annual Report, a copy of which page is included in Exhibit 13 to
this Report.
Item 8. Financial Statements and Supplementary Data.
Incorporated by reference to the consolidated financial statements and
related notes on pages 25 through 36 of the Annual Report, copies of which pages
are included in Exhibit 13 to this Report.
16
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors of the Registrant.
Incorporated by reference to the information under "Election of Directors"
at pages 2 through 4 and "Section 16(a) Beneficial Ownership Reporting
Compliance" at page 16 of the Proxy Statement.
Item 11. Executive Compensation.
Incorporated by reference to the information under "Executive Compensation"
on pages 7 through 9 of the Proxy Statement; the material under the captions
"Report of The Human Resources Committee" on pages 11 to 13 and "Performance of
the Company's Common Stock" on page 10 is not incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Incorporated by reference to the information under "Principal Stockholders"
beginning on page 14 of the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
None.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
The following documents are filed as part of this report:
(a) Financial Statements:
Auditors' Report on Financial Statements.
Consolidated Balance Sheets at June 30, 2001 and 2000.
Consolidated Statements of Income - for the Three Years Ended
June 30, 2001, 2000, and 1999. Consolidated Statements of
Stockholders' Equity for the Three Years Ended June 30, 2001,
2000, and 1999.
Consolidated Statements of Cash Flow - for the Three Years
Ended June 30, 2001, 2000, and 1999.
Notes to Consolidated Financial Statements.
The foregoing have been incorporated by reference to the Annual Report as
indicated under Item 8.
(b) Financial Statement Schedules:
Auditors' Report on Financial Statement Schedules:
VIII - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
information is contained in the Consolidated Financial Statements or notes
thereto.
17
(c) Exhibits:
Exhibit No. Description
----------- -----------
3(a) Articles of Incorporation of the Company (Incorporated by
reference to Exhibit 3(a) of the Company's Registration
Statement No. 33-24398 on Form S-1).
3(b) Bylaws of the Company (Incorporated by reference to
Exhibit 3(b) of the Company's Registration Statement No.
33-24398 on Form S-1).
4(a) Copy of Note Agreement dated as of August 1, 1993,
providing for the issuance and sale of $25 million of
6.68% term notes ("Term Notes", incorporated by reference
to Exhibit 4.1 to the Company's Report on Form 10-Q for
the quarter ended September 30, 1993 (file number
0-17196)).
4(b) Copy of Term Notes dated August 27, 1993 (incorporated by
reference to Exhibit 4.2 to the Company's Report on Form
10-Q for the quarter ended September 30, 1993 (file
number 0-17196)).
4(c) Copy of Sixth Amended Line of Credit Loan Agreement
providing for the Issuance of a Line of Credit Note in
the amount of $20,000,000 (incorporated by reference to
Exhibit 4.1 to the Company's Report on Form 10-Q for the
quarter ended December 31, 1999 (file number 0-17196)).
4(d) Copy of Line of Credit Note Under Sixth Amended Line of
Credit Loan Agreement (incorporated by reference to
Exhibit 4.2 to the Company's Report on Form 10-Q for the
quarter ended December 31, 1999 (file number 0-17196)).
4(e) In accordance with Item 601(b)(4)(iii)(A) of Regulation
S-K, certain instruments respecting long-term debt of the
Registrant have been omitted but will be furnished to the
Commission upon request.
9(a) Copy of Cray Family Trust (Incorporated by reference to
Exhibit 1 of Amendment No. 1 to Schedule 13D of Cloud L.
Cray, Jr. dated November 17, 1995).
*10(a) Summary of informal cash bonus plan.
10(b) Executive Stock Bonus Plan as amended June 15, 1992
(incorporated by reference to Exhibit 10(b) to the
Company's Form 10-K for the year ended June 30, 1992
(file number 0-17196)).
10(c) Copy of Midwest Grain Products, Inc. Stock Incentive Plan
of 1996, as amended as of August 26, 1996 (incorporated
by reference to Exhibit A to the Company's Notice of
Annual Meeting and Proxy Statement filed September 17,
1996).
10(d) Copy of amendment to Midwest Grain Products, Inc. Stock
Incentive Plan of 1996 (incorporated by reference to
Exhibit 10.1 to the Company's Form 10-Q for the quarter
ended September 30, 1998 (file number 0-17196)).
10(e) Form of Stock Option with respect to stock options
granted under the Midwest Grain Products, Inc. Stock
Incentive Plan of 1996 (incorporated by reference to
Exhibit 10(e) to the Company's Form 10-K for the year
ended June 30, 1996 (file number 0-17196)).
10(f) Copy of Midwest Grain Products, Inc. 1996 Stock Option
Plan for Outside Directors, as amended as of August 26,
1996 (incorporated by reference to Exhibit B to the
Company's Notice of Annual Meeting and Proxy Statement
filed September 17, 1996).
18
10(g) Copy of amendment to Midwest Grain Products, Inc. 1996
Stock Option Plan for Outside Directors (incorporated by
reference to Exhibit 10.2 to the Company's Form 10-Q for
the quarter ended September 30, 1998 (file number
0-17196)).
10(h) Copy of Midwest Grain Products, Inc. 1998 Stock Incentive
Plan for Salaried Employees (incorporated by reference to
Appendix A to the Company's Notice of Annual Meeting and
Proxy Statement dated September 17, 2000, filed with the
Securities and Exchange Commission on September 15,
2000).
10(i) Form of Stock Option with respect to stock options
granted under the Midwest Grain Products, Inc. 1998 Stock
Incentive Plan for Salaried Employees (incorporated by
reference to Exhibit 10(e) to the Company's Form 10-K for
the year ended June 30, l996 (file number 0-17196)).
10(j) Copy of amendments to Options granted under Midwest Grain
Products, Inc. Stock Option Plans (incorporated by
reference to Exhibit 10.3 to the Company's Form 10-Q for
the quarter ended September 30, 1998 (file number
0-17196)).
10(k) Form of Option Agreement for the grant of Options under
the Midwest Grain Products, Inc. 1996 Stock Option Plan
for Outside Directors, as amended (incorporated by
reference to Exhibit 10.4 to the Company's Form 10-Q for
the quarter ended September 30, 1998 (file number
0-17196)).
10.5 Form of Amended Option Agreements for the grant of
Options under the Midwest Grain Products, Inc. 1998 Stock
Incentive Plan for Salaried Employees (incorporated by
reference to Exhibit 10.5 to the Company's Form 10-Q for
the quarter ended September 30, 1998 (file number
0-17196)).
10.6 Form of Option Agreement for the grant of Options under
the Midwest Grain Products, Inc. Stock Incentive Plan of
1996, as amended (incorporated by reference to Exhibit
10.6 to the Company's Form 10-Q for the quarter ended
September 30, 1998 (file number 0-17196)).
10.7 Form of Incentive Stock Option Agreement approved on
December 7, 2000, for use thereafter under the Stock
Incentive Plan of 1996 (incorporated by reference to
Exhibit 10.1 to the Company's Form 10-Q for the quarter
ended December 31, 2000 (file number 0-17196)).
10.8 Form of Incentive Stock Option Agreement approved on
December 7, 2000 for use thereafter under the 1998 Stock
Incentive Plan for Salaried Employees (incorporated by
reference to Exhibit 10.2 to the Company's Form 10-Q for
the quarter ended December 31, 2000 (file number
0-17196)).
10.9 Form of Memorandum of Agreement Concerning Options
approved on December 7, 2000 between the Company and
certain members of senior management, including the
following named executive officers: Ladd M. Seaberg,
Randall M. Schrick, Robert G. Booe, Dennis E. Sprague and
Dr. Sukh Bassi incorporated by reference to Exhibit 10.3
to the Company's Form 10-Q for the quarter ended December
31, 2000 (file number 0-17196)).
19
*10.10 Form of Lease Agreement dated as of August 1, 2001
among GE Public Finance, Inc., The Unified Government of
Wyandotte County, Kansas City, Kansas, and Midwest Grain
Products, Inc.
*13 Information contained in the Midwest Grain Products, Inc.
2000 Annual Report to Stockholders that is incorporated
herein by reference.
22 Subsidiaries of the Company other than insignificant
subsidiaries:
State of Incorporation
Subsidiary or Organization
Midwest Grain Pipeline, Inc. Kansas
Midwest Grain Products of Illinois, Inc. Illinois
Kansas City Ingredient Technologies, Inc. Kansas
*23 Consent of Baird, Kurtz & Dobson.
25 Powers of Attorney executed by all officers and directors
of the Company who have signed this report on Form 10-K
(incorporated by reference to the signature pages of this
report).
- ------------
* Filed herewith
No reports on Form 8-K have been filed during the quarter ended June 30, 2001.
SIGNATURES
Pursuant to requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the city of Atchison, State of
Kansas, on this 13th day of September, 2001.
MIDWEST GRAIN PRODUCTS, INC.
By /s/Laidacker M. Seaberg
Laidacker M. Seaberg, President
20
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Cloud L. Cray, Jr., Laidacker M. Seaberg and
Robert G. Booe and each of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution and re-substitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all reports of
the Registrant on Form 10-K and to sign any and all amendments to such reports
and to file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities & Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities indicated on the dates indicated.
Name Title Date
- ---- ----- ----
/s/Laidacker M. Seaberg President (Principal September 13, 2001
Laidacker M. Seaberg Executive Officer) and Director
/s/Robert G. Booe Vice President, Treasurer September 13, 2001
Robert G. Booe and Controller (Principal
Financial and Accounting Officer)
/s/Michael Braude Director September 13, 2001
Michael Braude
/s/Cloud L. Cray, Jr. Director September 13, 2001
Cloud L. Cray, Jr.
/s/Michael R. Haverty Director September 13, 2001
Michael R. Haverty
/s/Linda E. Miller Director September 13, 2001
Linda E. Miller
/s/Robert J. Reintjes Director September 13,2001
Robert J. Reintjes
/s/Randy M. Schrick Director September 13,2001
Randy M. Schrick
/s/Daryl R. Schaller Director September 13, 2001
Daryl R. Schaller
/s/James A. Schlindwein Director September 13, 2001
James A. Schlindwein
21
MIDWEST GRAIN PRODUCTS, INC.
Consolidated Financial Statement Schedules
(Form 10-K)
June 30, 2001, 2000, and 1999
(With Auditors' Report Thereon)
S-1
BKD, LLP
Certified Public Accountants
Twelve Wyandotte Plaza
120 West 12th Street, Suite 1200
Kansas City, MO 64105-1936
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
Board of Directors and Stockholders
Midwest Grain Products, Inc.
Atchison, Kansas
In connection with our audit of the consolidated financial statements of
MIDWEST GRAIN PRODUCTS, INC. for each of the three years in the period ended
June 30, 2001, we have also audited the following financial statement schedule.
This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits of the basic financial statements. The
schedule is presented for purposes of complying with the Securities and Exchange
Commission's rules and regulations and is not a required part of the
consolidated financial statements.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ BKD, LLP
Kansas City, Missouri
August 1, 2001
Member of Moores Rowland International
S-2
MIDWEST GRAIN PRODUCTS, INC.
VIII. VALUATION AND QUALIFYING ACCOUNTS
Balance, Charged to Charged Balance,
Beginning Costs and to Other End of
Of Period Expenses Accounts Write-Offs Period
--------- -------- -------- ---------- ------
(In Thousands)
Year Ended
June 30, 2001
Allowance for
doubtful
accounts $252 $ 82 $ 82 $252
Year Ended
June 30, 2000
Allowance for
doubtful
accounts 285 202 --- 235 252
Year Ended
June 30, 1999
Allowance for
doubtful
accounts 285 1,037 --- 1,037 285
S-3
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3(a) Articles of Incorporation of the Company (Incorporated by
reference to Exhibit 3(a) of the Company's Registration
Statement No. 33-24398 on Form S-1).
3(b) Bylaws of the Company (Incorporated by reference to
Exhibit 3(b) of the Company's Registration Statement No.
33-24398 on Form S-1).
4(a) Copy of Note Agreement dated as of August 1, 1993,
providing for the issuance and sale of $25 million of
6.68% term notes ("Term Notes", incorporated by reference
to Exhibit 4.1 to the Company's Report on Form 10-Q for
the quarter ended September 30, 1993 (file number
0-17196)).
4(b) Copy of Term Notes dated August 27, 1993 (incorporated by
reference to Exhibit 4.2 to the Company's Report on Form
10-Q for the quarter ended September 30, 1993 (file number
0-17196)).
4(c) Copy of Sixth Amended Line of Credit Loan Agreement
providing for the Issuance of a Line of Credit Note in the
amount of $20,000,000 (incorporated by reference to
Exhibit 4.1 to the Company's Report on Form 10-Q for the
quarter ended December 31, 1999 (file number 0-17196)).
4(d) Copy of Line of Credit Note Under Sixth Amended Line of
Credit Loan Agreement (incorporated by reference to
Exhibit 4.2 to the Company's Report on Form 10-Q for the
quarter ended December 31, 1999 (file number 0-17196)).
4(e) In accordance with Item 601(b)(4)(iii)(A) of Regulation
S-K, certain instruments respecting long-term debt of the
Registrant have been omitted but will be furnished to the
Commission upon request.
9(a) Copy of Cray Family Trust (Incorporated by reference to
Exhibit 1 of Amendment No. 1 to Schedule 13D of Cloud L.
Cray, Jr. dated November 17, 1995).
*10(a) Summary of informal cash bonus plan.
10(b) Executive Stock Bonus Plan as amended June 15, 1992
(incorporated by reference to Exhibit 10(b) to the
Company's Form 10-K for the year ended June 30, 1992 (file
number 0-17196)).
10(c) Copy of Midwest Grain Products, Inc. Stock Incentive Plan
of 1996, as amended as of August 26, 1996 (incorporated by
reference to Exhibit A to the Company's Notice of Annual
Meeting and Proxy Statement filed September 17, 1996.
10(d) Copy of amendment to Midwest Grain Products, Inc. Stock
Incentive Plan of 1996 (incorporated by reference to
Exhibit 10.1 to the Company's Form 10-Q for the quarter
ended September 30, 1998 (file number 0-17196)).
10(e) Form of Stock Option with respect to stock options granted
under the Midwest Grain Products, Inc. Stock Incentive
Plan of 1996 (incorporated by reference to Exhibit 10(e)
to the Company's Form 10-K for the year ended June 30,
1996 (file number 0-17196)).
10(f) Copy of Midwest Grain Products, Inc. 1996 Stock Option
Plan for Outside Directors, as amended as of August 26,
1996 (incorporated by reference to Exhibit B to the
Company's Notice of Annual Meeting and Proxy Statement
filed September 17, 1996.
10(g) Copy of amendment to Midwest Grain Products, Inc. 1996
Stock Option Plan for Outside Directors (incorporated by
reference to Exhibit 10.2 to the Company's Form 10-Q for
the quarter ended September 30, 1998 (file number
0-17196)).
10(h) Copy of Midwest Grain Products, Inc. 1998 Stock Incentive
Plan for Salaried Employees (incorporated by reference to
Appendix A to the Company's Notice of Annual Meeting and
Proxy Statement dated September 17, 2000, filed with the
Securities and Exchange Commission on September 15, 2000).
10(i) Form of Stock Option with respect to stock options granted
under the Midwest Grain Products, Inc. 1998 Stock
Incentive Plan for Salaried Employees (incorporated by
reference to Exhibit 10(e) to the Company's Form 10-K for
the year ended June 30, l996 (file number 0-17196)).
10(j) Copy of amendments to Options granted under Midwest Grain
Products, Inc. Stock Option Plans (incorporated by
reference to Exhibit 10.3 to the Company's Form 10-Q for
the quarter ended September 30, 1998 (file number
0-17196)).
10(k) Form of Option Agreement for the grant of Options under
the Midwest Grain Products, Inc. 1996 Stock Option Plan
for Outside Directors, as amended (incorporated by
reference to Exhibit 10.4 to the Company's Form 10-Q for
the quarter ended September 30, 1998 (file number
0-17196)).
10.5 Form of Amended Option Agreements for the grant of Options
under the Midwest Grain Products, Inc. 1998 Stock
Incentive Plan for Salaried Employees (incorporated by
reference to Exhibit 10.5 to the Company's Form 10-Q for
the quarter ended September 30, 1998 (file number
0-17196)).
10.6 Form of Option Agreement for the grant of Options under
the Midwest Grain Products, Inc. Stock Incentive Plan of
1996, as amended (incorporated by reference to Exhibit
10.6 to the Company's Form 10-Q for the quarter ended
September 30, 1998 (file number 0-17196)).
10.7 Form of Incentive Stock Option Agreement approved on
December 7, 2000 for use thereafter under the 1998 Stock
Incentive Plan of 1996 (incorporated by reference to
Exhibit 10.1 to the Company's Form 10-Q for the quarter
ended December 31, 2000 (file number 0-17196)).
10.8 Form of Incentive Stock Option Agreement approved on
December 7, 2000 for use thereafter under the 1998 Stock
Incentive Plan for Salaried Employees (incorporated by
reference to Exhibit 10.2 to the Company's Form 10-Q for
the quarter ended December 31, 2000 (file number
0-17196)).
10.9 Form of Memorandum of Agreement Concerning Options
approved on December 7, 2000 between the Company and
certain members of senior management, including the
following named executive officers: Ladd M. Seaberg,
Randall M.
Schrick, Robert G. Booe, Dennis E. Sprague and Dr. Sukh
Bassi incorporated by reference to Exhibit 10.3 to the
Company's Form 10-Q for the quarter ended December 31,
2000 (file number 0-17196)).
*10.10 Form of Lease Agreement dated as of August 1, 2001 among
GE Public Finance, Inc., The Unified Government of
Wyandotte County, Kansas City, Kansas, and Midwest Grain
Products, Inc.
*13 Information contained in the Midwest Grain Products, Inc.
2000 Annual Report to Stockholders that is incorporated
herein by reference.
22 Subsidiaries of the Company other than insignificant
subsidiaries:
State of Incorporation
Subsidiary or Organization
---------- ---------------
Midwest Grain Pipeline, Inc. Kansas
Midwest Grain Products of Illinois, Inc. Illinois
Kansas City Ingredient Technologies, Inc. Kansas
*23 Consent of Baird, Kurtz & Dobson.
25 Powers of Attorney executed by all officers and directors
of the Company who have signed this report on Form 10-K
(incorporated by reference to the signature pages of this
report).
- ------------
* Filed herewith
No reports on Form 8-K have been filed during the quarter ended June 30, 2001.